MEMPHIS — A large Brazilian crop and more projected exportable supplies in certain parts of the world are likely to keep new crop cotton prices in a trading range of 20 cents from high to low in the coming year, according to Jarral Neeper, vice president, marketing, Calcot, Inc.
Meanwhile, U.S. old crop prices aren’t moving higher either, despite USDA’s estimated offtake for the U.S. crop of 20 million bales for 2003-04, noted Neeper, speaking at the Ag Market Network’s June teleconference.
One reason is that “USDA’s total offtake number this year is probably a little bit too high,” Neeper said. “USDA has U.S. consumption for 2003 at 6.3 million bales. I think we’re actually going to slip under that number a little bit.”
Hitting the projected export target of 13.8 million bales also might be a bit of a reach, according to Neeper. “We need to make up on some shipments, and I just don’t think that is going to happen. At best, I think we’ll ship 13.4 million bales.”
This would put total offtake for 2003 at about 500,000 bales less than USDA estimates, according to Neeper. “It’s not a big number, but psychologically, it’s had a tremendous impact on all the players.”
Brazil’s recent record crop of 5.65 million bales is also a downer for the market, according to Neeper. “They only have a domestic market of 3.8 million bales. So they certainly have a lot of cotton available for export. This cotton is going to compete with U.S. cotton from now until their crop is harvested.”
In addition, “merchant long-basis positions that were accumulated with additional Chinese buying in mind are weighing heavily on the market right now. The Chinese have slowed their economy, which is affecting the amount of cotton they think they can buy. Merchants want to get rid of old crop inventory before we get into new crop conditions.”
Neeper also believes that continued unrest in the Middle East creating “great uncertainty in the world” is also pressuring prices.
The new crop outlook is relatively bearish in the United States, and bullish just about everywhere else, according to Neeper.
The bearishness in the United States is due to projections that higher-than-expected yields will more than offset reductions in cotton acreage. Neeper projects a 13.7 million-acre U.S. crop, with a harvested acreage of 12.8 million acres. “I think we’ve generally had a pretty good start in the United States, probably better than average. USDA’s crop conditions reports certainly are indicating this.
“Because we’re in such better shape than we were a year ago, I think yields are going to do a little better than I was expecting, and we could see a crop of 18.4 million bales for the 2004 crop year. Hopefully, this will be the largest number that I see all year.”
That plus a 4.1 million bale carryover would produce a total U.S. supply of 22.5 million bales. Subtracting 5.8 million bales of domestic consumption would take supplies down to 16.7 million bales. Neeper is forecasting exports of 10.8 million bales, “but this could easily be larger, especially if the Chinese crop has any problems.”
The resulting U.S. 5.9 million-bale carryover for the 2005 crop year is “a relatively negative number.”
As for the world numbers, “China is the key for both the production and consumption side,” Neeper said. “I think USDA is probably a little fat on the Chinese crop size right now. Like the United States, there are a lot of questions surrounding planted area.”
Neeper believes that the Chinese cotton crop will come in around 27.9 million bales, 1.1 million bales smaller than USDA’s estimate. “Beginning stocks of 6.4 million bales gives them a total supply of 34.3 million bales.
Meanwhile USDA’s consumption number for China is 34.2 million bales. “No doubt, they have the capacity to consume that much, so they’re going to have to import a larger amount of cotton. USDA has China’s imports at 6.5 million bales. I believe with a little smaller crop size, the import number will probably have to be 7 million to 7.5 million bales, just to get them through the year.”
Neeper is projecting that foreign countries less China will have beginning stocks of 22 million bales, down 1.5 million bales from 2003. Production in these countries is forecast at 54.7 million bales, up 1.8 million bales. Consumption is projected at 59.5 million bales. Ending stocks are 20.5 million bales, down 1.5 million bales from a year ago, and considerably less that USDA’s number of 24.2 million bales.
“The thing that scares me most is when you take the largest consuming and producing countries in the world — China, India and Pakistan — out of the equation, you have an increase in exportable supplies of around 4 million bales.
“You have import needs in China, India and Pakistan that are 2.6 million bales smaller than they were in 2003. You have a large increase in exportable supplies outside of these countries and a relatively large decrease in import needs in those three countries.
“Everybody is going to fight for import share in those three countries. Then you have Brazil with a crop that is going to be marketed 12 months out of the year. They’re anxious to earn marketshare and they’re going to be very price-competitive.
“To sum up, the numbers themselves aren’t terribly bearish, but they aren’t terribly bullish either,” Neeper said. “Unlike the 2003 crop year, when we had this 30-cent wild ride from top to bottom in a short period of time, I think we’re going to spend most of the 2004 crop year trading in a pretty narrow range. I think all we’ll see is a 20-cent run from low to high all year, unless something unusual happens.
“That means a 48 to 52 range on the low side for the nearby contract to 66 to 71 cents on the high side. I don’t think we’ll see a repeat of last year when we made the highs when we typically would see the lows.
“If you want to participate in the options market right now, the volatility is extremely high and it’s expensive to protect yourself on the downside or the upside,” Neeper said. “Quite frankly, a lot of this cotton is going to go straight into the loan until we can get a better picture of where this market is going.”